• 12 / 02 / 2008
  • The Korea InvestorsĄ¯ Forum in London and New York Held by the Financial Services Commission.

  • The Korea Investors’ Forum was held by the Financial Services Commission (FSC) on the 17th of November at the Landmark Hotel in London, and then on the 18th at the New York Palace Hotel in New York.

    On your part having heard to excellent speeches already, I'm not sure whether you have enough room to take another one. At this point, I'm inclined to make y presentation very short. However, I came here last night and I'm leaving this evening so I cannot have a very brief presentation indeed.

    So please bear with me even though, I may have to spend 20 minutes or so.
    First of all, thank you very much Mr. Seo, for your kind introduction.
    Ladies and gentlemen, I would like to welcome all of you and thank you for taking the time to be with us today.
    As I deeply appreciate your presence this afternoon, I made a very long day-trip all the way from Seoul for this event and come back this evening.
    During the presentation, I will first discuss Korea’s economic and financial position, then provide answers to some of the concerns that investors have raised over the Korean economy. I will also explain briefly policy measures that the Korean government has recently implemented to cushion adverse impact of the global financial crisis.

    First, let us take a look at Korea’s overall economic picture.

    Korea's macro-economy remains sound with a growth rate of 3.9% for the third quarter of this year. As you know well, Korea depends on export because we don’t have much natural resources. If you look at the graph on the right, Korea’s exports have
    grown consistently, and this trend has continued in the third quarter of 2008.
    This year’s export growth rate is 23% as of September this year.
    Korea has maintained sound fiscal balances and low sovereign debt levels.
    Fiscal surplus was estimated by S&P at 2.1% of the GDP for the first half of this year.
    The current account balance posted a deficit of $13.8 billion as of September, largely due to the spike in crude oil prices we have had earlier this year.
    But thanks to the fall in oil prices, we expect the current account deficit to turn
    into a surplus from October recording around $1.5 billion. Including the surplus in
    the fourth quarter, we estimate this year’s current account deficit will be below $ 10 billion, which is just 1% of our GDP.
    And we expect the recent trend of current account surplus to continue. Of course, it depends in the market situation. But considering the time lag effect in the oil price, current account balance is expected to record a surplus in the first half of next year.

    As for the banking sector, Korean banks have had a good track record for the past several years in terms of asset soundness, capital adequacy, profitability and liquidity.
    The average NPL ratio of Korean banks has dropped to 0.7% in 2008, a historically low level. The average ROE was in the 15 to 20% range.
    The BIS capital ratio has been robust as well, moving in the 12-13% range from 2005 to 2007. This year, with the slowing economy, it has fallen below this level. While this is not a welcome development, it must be said that this is not a structural problem, but a mere reflection of the broad economic slowdown, along with bank assets and earnings coming under some short-term pressure. I would also stress that Korean banks are taking steps to strengthen their capital, and even now, with ample loan loss provisions, they are sufficiently capitalized to offset any likely future loan losses.
    Korea’s corporate sector has also shown strong financial soundness over the past several years. The earnings of listed companies have improved greatly, and the debt to equity ratio has been on a broadly downward trend for some years now. It stays as low
    as around 100% range in 2007. I may add that the competitiveness of Korea’s blue chip companies is indeed the strength of our economy, which will help us successfully cope with the global financial crisis.

    Despite Korea’s economic fundamentals, the global financial crisis has prompted
    some concerns over how Korea’s financial sector and the broad economy will perform going forward. Let me address some of the concerns that have recently been raised.

    In this slide, you will see some of the key concerns that have recently been raised. They can be grouped into three general areas: (1) external debt, (2) bank leverage and liquidity, and (3) household debt. The first is about the level of external debt.
    Here, the concern is that Korea has borrowed too much as it did in 1997, and
    that its foreign reserves, despite the size, are not liquid enough to meet the short-term liabilities.

    Let me break down Korea’s external debt and show you what it really looks like.
    As of the end of June, 2008, the total gross external debt came to $420 billion, of which 41%, or $176 billion, was short-term debt.
    Of the $176 billion short-term debt, $11 billion was in won-denominated government bonds held by foreign investors, and $80 billion was borrowings by foreign bank branches.
    Net of these two sums, $91 billion, the short-term foreign debt of domestic banks and companies comes to $85 billion.
    Let me also note that about $152 billion of the $420 billion, or about a third of the total, poses no default risk at all. That is, they are not subject to any future repayment obligation.
    This is because $7 billion is for pre-FDI funding, $94 billion is for forward hedging, and $51 billion is advance receipts for shipbuilding contracts.
    Net of these sums, Korea’s real foreign debt comes to about $268 billion, not $420 billion as often overstated in the report. Another concern is that Korean banks are overleveraged and will therefore encounter liquidity difficulties.
    Let me first reiterate that, as of October, 2008, Korea’s foreign reserves stood at about $210 billion, world’s 6th largest.
    This far exceeds the IMF standards of 3-month import payment, which is $145 billion. The reserves also mostly consist of highly liquid assets, 91% of which are highly rated bonds, rated AA or higher. The Bank of Korea also has ready access to $30 billion through a swap arrangement with the U.S. Federal Reserve. There are also discussions under way to expand the existing bilateral swap arrangements Korea has with other countries. Another concern often raised is that Korean banks could suffer from a sub prime like crisis if housing prices start to decline. Korean banks have recently encountered some difficulties securing overseas funding as a result of distress in the global credit markets. I must say that, on balance, Korean banks have been faring relatively well compared with others, thanks to the surplus funds they have accumulated from the first half of the year. It is true that Korean banks are facing some difficulty securing foreign funding because of tight offshore credit conditions. What they are basically trying to do is to maintain their foreign trade financing. So their funding difficulty should not be viewed as a reflection of any solvency problem.
    Furthermore, government actions including $100 billion external debt guarantee have significantly reduced bank liquidity concerns. The decision by S&P on October 31 to remove major Korean banks from its negative watch list was, I believe, based on the same findings.
    Moreover, we remain confident about the asset quality of domestic financial institutions. Loan growth has been moderate in recent months, signaling improved risk management by banks, and most importantly, delinquency ratios remain at or near historical-lows, 1.5% in the case of SME loans and 0.6% in the case of household loans.
    Our banks have a sufficient buffer to absorb loan losses. The average coverage ratio is about 186%. Given these statistics, as a regulator, I am very confident about the financial conditions of Korean banks. Let me also assure you that the loan-to-deposit ratio of domestic banks has gradually declined to 101% last month, which is similar to the U.S. level, and far below 130% to that which has been cited by some foreign media. The misconception comes mostly from the exclusion of CDs. In Korea, CDs have similar characteristics to deposits due to its more than 40% of re-commitment rate. Moreover, more than 80% of CDs are sold to retail clients through over-the-counter bank teller sale. Therefore, it is reasonable to include CDs in calculating loan-to-deposit ratios and that is an internationally accepted norm.
    Is there a mortgage crisis in the making in Korea with falling housing prices?
    Here I must say that Korea will be very unlikely to face a mortgage crisis.
    I say this because of our prudential regulations. The Korea’s financial authority
    has in place tough loan-to-value ratio requirements for mortgage loans since
    2002. This was followed by equally tough debt-to-income ratio requirements
    since 2005.
    Under the LTV and DTI requirements, borrowers can finance only up to 40 to 60% of the property value. They also have to comply with strict income and debt servicing tests. Currently Korea’s coverage LTV stands only at 48%.
    Obviously, the Korean economy will feel the effect of the global economic Down turn, and bank mortgage assets will come under some pressure.
    But I would like to emphasize that Korea is in a strong position to implement a variety of fiscal and monetary measures to cushion the impact of economic slowdown.
    And the government has already made it clear that it stands to ready to act, given that Korea enjoys among the lowest government debt to GDP ratio at 30%.
    The Korean government recognizes the extraordinarily difficult circumstances the global economy is in as well as the pressure domestic economy faces.
    To date, the government has acted decisively and has taken a number of steps to cushion the effect of the slowing global economy.

    Let me talk briefly about steps taken to boost foreign currency liquidity. As I noted earlier, the government gave domestic banks a $100 billion foreign debt guarantee that will stay in effect until June next year. A total of $35 billion has also been supplied to the market through swap and loan arrangement by the Bank of Korean and the finance ministry.
    In addition, a swap line of $30 billion has been established with the U.S.
    Federal Reserve, and the government is working to expand the swap arrangement currently in effect with China ($4 billion) and Japan (13billion). Other steps, such as relaxing bank liquidity requirements and creating new liquidity facilities for the secondary lending institutions, have also been taken. The government is also insisting that banks continually manage risk prudently, raise capital and improve asset soundness in return for the support they are receiving. This is in fact what the government insisted in the MOU it signed with the banks receiving government debt guarantee.
    A total of $26 billion has also been allocated for a combination of stimulative measures such infrastructure spending, tax cuts, interest rate cuts, and SME credit support. We believe that these measures provide timely support the economy needs
    to absorb the impact of the slowing economy. Again, the government has more than enough maneuvering room for further stimulative measures, and it stands ready to do so if the situation warrants them.

    Let me close my presentation by thanking you once again for joining us today and giving you our assurance that the Korean government will continue to act boldly and decisively to contain the fallout from the global financial crisis and the deteriorating economic prospects.
    What we need now is neither pessimism nor passivity, but an unrelenting determination to face up to the challenges ahead with the confidence that we will be on the verge of a transition to a new era of stability and prosperity. Korea has a strong track record of remarkable resilience, defying pessimistic views.
    Our macroeconomic fundamentals remain sound, as are our financial markets, even in this turbulent global environment.
    We are taking aggressive yet prudent measures to keep the economy on a sustainable growth track. We believe the steps we are taking will prove right, and that the economy will pull through. And I hope that you will continue to be our faithful investment partners for the light future of the Korean economy.
    Thank you.

    Q: At last weekend at G20 Bush was talking about smarter government regulation.
    From Korean regulator perspective, what would be the policy direction going forward? Having for example, we have problems like KIKO as a deliberative product as well. So what would be regulatory direction going forward?

    A: Yes, that's a good question and very timely question indeed. As you know, Korea will be one of three countries who will work very hard to prepare for the next G20 submit before the submit starts. Submit is expected to be held before next April and we have disseminates assignment to prepare the very detailed agenda for discussion by March and number of items are included there and Korea along with U.K and Brazil these are 3 countries will working together. And obviously in them, regulations or deregulation will be important issue there.
    Smart regulation is a good word, but essentially what Korea is trying to do is not necessary more regulation but we are looking for better regulation. I think that is the simple way of our policy stance on regulation. Now, that we have number of de-regulation measures that we're going to push forward through National Assembly, our basic stance is that even though in the aftermath of the global financial crisis, the mood around the world is to strengthen regulations, tight regulation but it depends on what type of regulation we are talking about. According to the recent survey by the World Bank, Korea's level of regulation stands around 45 in the world, meaning we still have too many unproductive excessive regulations. So what we will be working on will be some relaxation on those excessive unproductive anti competitive regulations but at the same time we will be working on strengthening supervision to achieve greater market stability and to achieve investor protection market stability I think its kind of dual track approach that we are going to pursue when it comes to regulations. So simple answer to your question is rather

    Q: Dr Jun. Very good presentation thanks you. I just have one question. Where the government is stands with respect to allowing chaebols the large conglomerate to buy into the banks, local banks in Korea. What is the status might be? Thank you

    A: That is also excellent question timely question related to the first question that you rose. Because this is one of the kind of reform measure that we are pushing forward this time actually will be going national Assembly for the revision of banking law which will allow greater share industrial investment allowed for banking investment. Now, currently it is very tightly restricted only up to 4% as you might know.
    Now we are looking to expand that to 10%. I don't think this is excessive because even U.S which has traditionally managed very tight break down between commerce and banking recently increase that from 10% to 15 percent. The reason why we are pressing this forward extremely this time, even though there is opposition there, is that this will allow commercial bank to better raise fresh capital base to strengthen their capital base so I think in this way this idea gained great momentum after global finance crisis. Because it is extremely important for all the regulators in the world to help banks better capitalize them. And in Korea allowing very healthy large corporations to put some of their available cash in the form of bank capital I think that will be great plus for the health of commercial banks. Its total management issue is separated. I don't think by having only 10% share the investor can exert complete control of the banks. So I think we are moving along that line and we're hoping that new law will be passed within year. Thank you.

    Thank you so much Mr. Jun.

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